Taking to the stage at Deutsche Bank’s second day of investor presentations earlier this month, Colin Fan and Rob Rankin, the new co-heads of the bank’s corporate banking and securities division, were met with an air of expectancy akin to that of a debutante ball.

Anshu Jain

The event marked the culmination of the bank’s 100-day review – a period during which both Fan and Rankin had quickly had to get used to a heightened level of public scrutiny following their promotions – and provided a first opportunity for analysts and investors to see the duo in action.

The ground had been prepared by Anshu Jain, their predecessor and now group co-chief executive, who, on Tuesday September 11 explained that group management had decided against providing analysts and investors with a revenue target for the unit. “Why? We don’t really have visibility on revenues. We’re controlling what we can control, which is costs and capital. We let the revenues float within reason to where they go.”

Kicking off his presentation on CB&S, Rankin paid his respects to his predecessor, describing the business he and Fan had inherited from Jain as a “phenomenal franchise”, adding that the division’s journey from modest beginnings to a top-tier competitor marked an “unprecedented achievement”. The congratulatory tone ended there.

He said: “Colin and I also recognise we’ve been asked to lead the investment bank through the most challenging macroeconomic and regulatory environment this industry has ever seen. The scale of that challenge is daunting. We get it. We really do.”

The Deutsche Bank view, first set out by Jain and then echoed by Fan and Rankin, can be broadly defined as follows. First, investment banking services are critical to the economy. Second, Deutsche Bank is a market leader. Third, it follows that a satisfactory return on equity will be achieved eventually. But, fourth, the bank has some tough decisions to make in the short term.

On costs, the bank set out plans to “optimise” certain business lines, with 900 job cuts in the front office, principally focused on equities and corporate finance in Europe and Asia-Pacific.

Rankin said: “We won’t reach our financial targets through revenue growth. We won’t get there. We don’t expect revenues to reach pre-crisis levels, and we don’t believe there will be cyclical return to the core profitability of the industry from the first part of the 2000s. As a result, we’ve got to go on a diet. We’ve got to cut our cloth accordingly.”

Related

Fan later added: “There are no luxuries. One of the things that is hard to demonstrate on a two-dimensional piece of paper is the giving up of optionality, convexity, whatever you want to call it, the lottery ticket. All of the things in the past we thought would be good, and came with a cheap cost to maintain optionality: they are gone.”

Meanwhile, the bank outlined a new approach to compensation in a business where, by Jain’s admission, “profit-sharing between investors and employees has been most asymmetric”.

This will affect both those at a senior level – with around 150 top managers now liable to a five-year cliff vesting period for bonus payouts – and staff more generally – with bonus payments reduced in relation to business performance.

In addition, the bank has created a non-core operations unit with around €135bn in risk-weighted assets, €100bn of which comprise legacy assets from CB&S.

Deutsche plans to sell the first third, or €45bn of assets, by March next year, by which point it expects to have cut another €45bn in RWAs using a variety of measures, including right-sizing its trading inventory and rolling out more advanced risk models. It is hoped this initiative will, along with a programme to cut annual costs by €4.5bn, help it meet its capital goals organically.

Paddling furiously

On being asked why Deutsche Bank hadn’t taken more drastic action, Fan, who was evidently more comfortable during the question and answer session than the presentation, quipped: “It is a lot like a duck; you don’t see it paddling furiously under the water, even as it glides serenely on top.”

The query had been delivered by Chris Wheeler, an analyst from Mediobanca, who had asked why the bank hadn’t set out plans to exit a larger number of businesses. Fan’s response was decisive, explaining that exiting businesses wholesale was often “dangerous”, given the difficulty surrounding determining links between one business and another.

He added: “I was talking about investing in FX. It certainly doesn’t mean we’re just going to give them resources and say grow linearly. Even in good times, even as they are growing, even as they are investing, underneath, in terms of ripping out systems and recycling capital and people, it is intense.”

• Corporate finance
Strategy: re-tool

Deutsche Bank has developed an admirable corporate finance franchise in recent years, moving to the top of the investment banking fee tables in Europe, and ranking among the top six globally. The challenge now will be to maintain its market position while reducing the resources allocated to the business, most particularly in Europe.

Equity capital markets and mergers and acquisitions are the parts of this business that appear the most challenged.

In his presentation, Rankin stressed that the bank didn’t expect equity capital markets activity “to come back to the historic peaks of previous years anytime in the scope of this plan”. Deutsche expects mergers and acquisitions volumes “to tick along”, with a modest increase as risk premiums decline in future.

While debt capital markets business has been firing on all cylinders, the overall direction of travel for the primary markets business is sideways. As a result, the bank has set out a strategy to do more with less, and be more focused with its resources.

Last year, the bank’s institutional clients group launched its “three to one” programme. The aim was to identify the clients it had the best chance of moving from third to first in wallet share. This is now set to be rolled out across other client segments.

Fan said: “For example, with corporate clients, which typically require lending, we are working with [chief risk officer] Stuart Lewis’s credit risk management group. We have undertaken a detailed line-by-line analysis of 2,000 of our clients, and [are] evaluating 4,000 loans, making sure to maximise return on risk-weighted assets, and taking into account the relationship length and strength, and the holistic profitability to our platform.

“This detailed analysis will shape our lending strategy as we tilt our lending resources towards certain regions and industry groups, and our best long-term clients of each of those.”

Meanwhile, the bank is cutting staff, with the European corporate finance business one of the areas likely to see the greatest focus. Financial News reported earlier this month that a wave of job cuts was sweeping through the business, with a number of high-profile bankers among those let go. Managing directors made up around a quarter of the total redundancy pool, as the bank looks to cut not just headcount, but costs.

• Sales and trading
Strategy: invest and evolve

The delineation of the Deutsche Bank sales and trading businesses could not have been made clearer. While the bank plans to invest and evolve the fixed-income, currencies and commodities franchise, the equities business – faced with both cyclical and structural challenges – is in need of a turnaround.

In fixed income, the bank has earmarked foreign exchange in particular as an investment opportunity. Perhaps of more importance, the bank has also set out plans to transform its broader FICC franchise using FX as a model, a process that will be managed by Zar Amrolia, the global head of FX who has been appointed to lead a new markets electronic trading unit.

Fan said: “I remember years ago, when Jim Turley [now chief operating officer of global transaction banking at Deutsche Bank] and then Zar Amrolia under Alan Cloete [now co-chief executive of Asia-Pacific] were describing the transformation the FX business was going through, and I was horrified by the disruption of extreme commoditisation as well as the crushing weight of margin compression they were facing, which honestly would have obliterated any bid/offer business model that I was familiar with.

“They adapted, and taught us the power of technology. They correctly embraced scale and the resulting efficiencies. They combined an obsessive refinement and enhancement mentality, and FX has delivered strong results both pre- and post-crisis, taking advantage of spikes in volatility volume, while of course extracting efficiency every other day.”

The bank now plans to implement technology-led infrastructure, which will result in two thirds of the over-the-counter flow businesses from institutional clients being directed towards electronic platforms – whether that be Autobahn, the bank’s own trading platform, or multidealer platforms. The remaining third will be directed to what the bank describes as “voice”, commonly known as a human sales force.
At present, voice represents two thirds of the flow, with electronic making up a third.

Fan said: “Seismic changes are sweeping through fixed income: regulatory changes, technological innovation, margin compression. These are all going to transform trading. Rather than seeing these as a threat, we see this as an opportunity to accelerate and recalibrate our cost base and to improve our cost/income ratio by embracing electronification, by embracing straight through processing.

“The highly liquid products, like index CDS and interest-rate swaps, will move to electronic platforms, like our Autobahn system, or multidealer platforms like Tradeweb. The size and shape of our sales force will move accordingly towards a platform marketing and e-sales role, which will require [lower] headcount than now.”

In contrast, both the European and Asia-Pacific equities businesses are included in the “turnaround” bucket in Deutsche’s strategic priorities. Given that, by the bank’s own metrics, Deutsche ranks number one in European cash and Asia-Pacific cash, and third in European equity derivatives, the bank’s plans show how difficult the equities business now is.

Fan said: “Equities is a structurally high cost-income business, though it is a low user of capital. By reducing the cost-income ratio, while preserving critical mass, equities can be accretive to return on equity when markets normalise. The key is to get that break-even to an acceptable level. We can re-size, re-tool, maintain our market position and increase our operational leverage by making sure we get the break-even right.”

--This article was first published in Fianancial News's print edition on Monday, September 24